Banking 101: What is a Credit Union?

Note: This article is part of our
Basic Banking series, designed to provide new savers with the key skills to save smarter.

A credit union is a nonprofit financial institution that’s owned by members, rather than shareholders, and is overseen by a volunteer board. Members of the credit union have the right to vote for board members and thus help influence how the credit union is run.

Because they operate a bit differently than for-profit financial institutions, credit unions sometimes boast lower fees and more competitive rates than what you’ll find at a competing bank. However, they also tend to be more exclusive. Many credit unions are set up for specific communities and only accept members from particular regions, professions or groups.

How do banks and credit unions compare?

Credit unions offer many of the same services and financial products that banks do and are governed by many of the same rules. For example, both are subject to Regulation D, which caps the number of withdrawals people can easily make from their savings accounts at six per month. Checking account withdrawals at both institutions, by contrast, are unlimited.

However, the terms that banks and credit unions offer on deposit accounts, loans and other financial products can sometimes be quite different. For example, credit unions consistently offer some of the lowest rates available on select loans. Many credit unions also offer competitive savings account rates, with APYs, in some cases, running as high as 2.10 to 2.15%.

“More often than not, you’re going to get a better rate on your savings account at a credit union and lower fees as compared to a bank,” said Bobby Grant, a spokesman for the National Association of Federally-Insured Credit Unions (NAFCU).

Credit unions say they can afford to offer competitive terms because their loyalties are to members, rather than shareholders. Banks, by contrast, are set up to not only serve customers, but also turn a profit. In addition, unlike banks, credit unions are exempt from paying taxes and so have more flexibility to offer lower rates and fees.

The flip side to credit unions’ nonprofit status, though, is that banks’ tax dollars benefit communities in a way that credit unions don’t, says Michael Emancipator, vice president and regulatory counsel for the Independent Community Bankers of America (ICBA). “Not only are [banks] providing for the credit needs of the community, they are also filling the local community’s tax coffers,” said Emancipator.

A brief history of credit unions

Credit unions have been around, in some form, since the middle of the 19th century. However, the first U.S. credit union didn’t open until 1909 when Massachusetts passed a law supporting them. After a sharp uptick in the number of states allowing credit unions in the 1920s and 1930s, credit union membership grew throughout the early 20th century. By 1960, more than 6 million people belonged to a credit union.

Today, more than 117 million consumers belong to one of the 5,335 federally-insured credit unions in the country. According to the NAFCU, credit unions are enjoying substantial growth in membership rates, despite a decline in the total number of credit unions available. For example, 4.6 million consumers joined a credit union between early 2018 and early 2019, a National Credit Union Administration (NCUA) study found. Meanwhile, credit unions held $90 billion more assets in the first quarter of 2019 than they did the previous year. However, despite their popularity, some credit unions are closing or merging with other institutions. Between early 2018 and early 2019, 195 credit unions closed down.

What is a credit union membership?

Unlike banks, which are typically open to anyone in the country or in a particular region, credit unions are only open to people who become members.

The rules for membership vary widely, depending on the credit union. However, credit unions typically only extend membership to people who have some kind of mutual connection, such as a shared profession, region or membership in a club or association. As a result, the rules for becoming a member can be quite strict. For example, some credit unions only accept members who are associated with the military or with firefighters. Others only accept members who work for an airline or are associated with certain faith groups.

Don’t be deterred, though, if a credit union near you has a name that sounds exclusive. Some credit unions, such as Teachers Credit Union, have more relaxed criteria than their name implies. Others will allow anyone to join as long as you make a small donation to a designated nonprofit.

What products do credit unions offer?

Credit unions typically offer the same products that you’ll see at a bank, such as checking accounts, savings accounts, credit cards, mortgages and personal lines of credit. However, credit unions may not offer as extensive a collection of products as banks do, so think carefully about what you’re looking for before you apply for membership.

What is a credit union: Pros and cons of credit unions

In addition to offering competitive rates and terms, credit unions also offer more personal customer service, says NAFCU’s Bobby Grant. For example, “credit unions will often help tailor their loans for first-timers,” he said. They may also be more willing to work with you to negotiate new terms if your finances are hit by an unexpected event, said Grant.

Credit union advantages

More accessible customer service. Since credit unions are small, you may feel more comfortable developing a more personal relationship and asking for help from your local credit union when you need it. You may also find that a smaller credit union prioritizes individual customer service more than a big bank.

Competitive products. Fewer financial institutions offer free checking nowadays, according to the intelligence firm Moebs Services. However, you’re still more likely to find a free checking account at a credit union, Moebs found. In addition, you’re likely to earn much higher rates on select savings vehicles. For example, research by S&P Global found that earning rates on certificates of deposit and money market accounts are significantly higher, on average, at credit unions than at banks. Rates on car loans, home equity loans, credit cards and mortgages also tend to be lower. In fact, credit unions even cap rates on credit cards at 18%, which is well below what many bank cards charge.

Profit sharing with members. Some credit unions also reward members by regularly paying out dividends or loyalty bonuses as a way of sharing the credit union’s profit.

Credit union disadvantages

They are less convenient to join. You can’t just walk up to any credit union and open an account. You need to fill out an application for membership and sometimes meet fairly stringent criteria in order to qualify.

They might not be able to follow you if you move. Unlike larger banks, many credit unions are tied to particular regions. So if you move, you may have to move your money somewhere else.

They may not offer as many bells and whistles as banks do. If a credit union is small, it may not offer the same kind of financial technology that you can find through a bigger bank, such as a well-designed mobile app or easy-to-navigate website. In addition, its selection of financial products may not be as diverse or rewarding as the products offered by well-established banks.

Who should be using a credit union?

A credit union is best suited for someone who plans to stay put in the same region or remain a member of a particular association or other qualifying group for a long time. If you care more about low rate loans and competitive savings account rates than slick mobile apps or credit cards with cushy rewards, then you may also be a good credit union candidate. In addition, consumers who like the idea of having a personal say in how their financial institution is run are a good match for a credit union.

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